Longyuan Power kicks off IPO of up to $2.3 billion

China's leading provider of wind power, China Longyuan Power Group Corp, yesterday kicked off the roadshow for an initial public offering that aims to raise between HK$13.42 billion and HK$17.49 billion ($1.7 billion to $2.3 billion).

This is the first time that investors will have the opportunity to invest in China's rapidly growing wind power sector at the generation level, which is expected to be a key beneficiary of the government's desire to increase the proportion of the country's electricity that comes from renewable energy sources. While China derives less than 1% of its electricity from renewable energy sources today, Beijing has set a target to increase the country's wind power generating capacity ten-fold to 120,000 megawatts by 2020 from 12,000MW at the end of 2008.

Longyuan, whose installed capacity amounts to 2,900MW, is expected to grow in line with the overall industry to retain its 24% domestic market share. Some analysts also expect the company to become the second largest wind power producer in the world by 2013, from its ranking as the fifth largest today.

The IPO, which is arranged by Morgan Stanley and UBS, is likely to be a welcome change for investors after the wave of property companies that have been tapping the market over the past couple of weeks. And, if the cornerstone process is any indication, then Longyuan seems to have the wind firmly behind it.

According to the preliminary prospectus that was issued in connection with the investor luncheon in Hong Kong yesterday, the company has signed up four cornerstones that will buy a combined $330 million worth of shares. In addition to that, Longyuan late on Monday signed with a fifth investor -- China Investment Corp -- which will buy $400 million of the deal with an agreement not to sell any of its shares for the first 12 months.

This means that between 31.7% and 42.9% of the deal has been pre-sold before the order books were even opened. Given that the deal is coming so late in the year, this is probably the smart thing to do to generate sufficient momentum in the bookbuilding, and more importantly the endorsement by CIC should act as a powerful confidence builder. The $200 billion Chinese sovereign wealth fund has been making a series of investments globally over the past few months, targeting primarily natural resources and agricultural assets.

The other cornerstones comprise: China Life Insurance, which is buying $180 million worth of shares; private equity investor Wilbur L Ross, who is taking $100 million of the deal; Value Partners, which is taking $30 million worth; and a fund affiliated with Hong Kong tycoon David Li, which is investing $20 million.

In all, Longyuan is offering 2.143 billion new shares, or a 30% stake in the company, with 5% earmarked for Hong Kong retail investors. The latter tranche may be increased to a maximum of 20% depending on the level of demand.

The price range has been set at HK$6.26 to HK$8.16, which translates into a 2010 price-to-earnings multiple between 22.2 and 28.9, based on the consensus forecasts by the joint bookrunners.

The Hong Kong public offering will start on Friday and the entire deal will stay open until December 2 with pricing expected during New York trading hours on that day. The trading debut is scheduled for December 10.

Beijing-based Longyuan is a first-mover when it comes to the building of wind farms in China and as a result, it has been able to acquire quite a lot of the best wind sites in the country. In addition to its existing installed capacity of 2.9GW, the company also has enough land, across 15 different provinces, on which to erect wind turbines with a combined capacity of 43GW. Together with the funds raised from the IPO, this means that Longyuan has the key ingredients in place already to deliver on its growth plans.

One syndicate research report expects the company to reach 6.6GW of installed capacity by the end of 2010 and to add 1-2GW of new wind capacity every year going forward. As far as earnings are concerned, this expansion should see net profit double to Rmb885 million ($130 million) in 2009 and double again to Rmb1.76 billion in 2010, analysts believe. With no fuel costs, the company enjoys a 90% gross margin on wind generation and the state-owned power grid is obligated to buy all the power it produces.

At the same time, a new wind tariff regime in China now allows efficient wind farm operators to earn above-average returns while an oversupply of wind turbines should see expansion costs decline. Being a state-owned enterprise - it is controlled by Guodian, a wholly state-owned power producer focusing primarily on coal and hydro power plants - Longyuan also enjoys a favoured status over private and foreign competitors when it comes to wind resource allocation.

For potential investors, a key question will be whether favourable policies will remain in place to allow them to make attractive returns. A direct comparison shows that wind tariffs in China are higher than coal tariffs in China, but lower than the corresponding wind tariffs in developed countries like Spain and Germany. However, a sector specialist noted that when China's lower cost base - including cheaper turbines and construction costs - is taken into account, the returns are still favourable.

Meanwhile, investors who prefer solar power to wind also have the opportunity to invest in a market newcomer over the next week or so as Trony Solar Holdings started bookbuilding for its US IPO yesterday as well. Trony, which makes solar cell modules using thin-film technology, is seeking to raise up to $214.5 million with the help of Credit Suisse and J.P. Morgan.

And for investors who still have room for another property developer in their portfolios, Kaisa Group Holdings took to the road with the aim of raising up to HK$4.45 billion ($574 million). The Shenzhen-based developer, which focuses on the re-development of old town residential sites, is being brought to market by BOC International and Credit Suisse.